Is your business facing cash flow issues due to slow-paying clients?
If yes, Invoice Factoring can serve as a quick and easy solution to this problem of yours.
Though waiting for customers to pay off their debts is painful, Invoice Factoring can help you get rid of this pain.
Today, where invoicing software is the way to go, you would be wondering what Invoice Factoring is all about. So, let’s have its quick overview here.
What is Invoice Factoring?
Invoice Factoring refers to selling a business's outstanding invoices to a third-party at discounted rates. This financing option varies from lender to lender. It usually ranges between 2% and 10% depending on the credit profile of the customers.
Ideally, the third-party purchases outstanding invoices from a business for 80% of its total value. Once those invoices get paid, the third-party will pay the remaining 20% value while deducting the factoring fees. Thus, businesses can secure cash instantly instead of waiting for 30 to 90 days. Businesses of all sizes put this into practice.
Now that you have known what invoice factoring is all about, let’s review its prime benefits.
Advantages of Invoice Factoring
As compared to conventional business financing options, invoice factoring comes with a lot of benefits.
1. It improves cash flow
When you apply for a loan, it may take months for approval. Then, it will take some more time to receive the amount on the hand after approval. But with this financing option, the foremost advantage that businesses can avail is improved cash flow. It provides access to cash easily and quickly. Thus, it helps you keep your business functioning smoothly.
As Invoice Factoring equips you with cash on hand, you can be worry-free to pay your business expenses – be it payroll or payments to the vendors. If you have short-term financing needs or can’t afford to wait for weeks, this option is the most viable.
2. It is a debt-free funding option
Invoice Factoring does not add to your liabilities. What the factoring company will do is collect payments from those who owe the invoices. Hence, it won’t increase your operational costs.
The only thing you need to remember is being cautious about the invoices you select to factor. Because, if the factoring company fails to collect the payments from invoices you factor, you will end up paying it.
3. It boosts business growth
For any business to grow, it requires steady cash flow. And, adapting Invoice Factoring ensures business growth. How?
- You can invest your time in acquiring new customers rather than chasing the debtors
- If your loyal customers require credit facilities, you can easily extend your credit lines towards them
- As you have the required cash on hand, you can pay your suppliers; thus, avoiding any consequences in the supply chain
- Instead of averting creditors, you can capitalize on your growth opportunities – be it strengthening your sales/marketing efforts, equipment expansion, or more
Thus, you can surpass your competitors facing funding issues by leveraging Invoice Factoring.
4. It is an affordable financing option
Generally, large funding institutions like banks tend to deal with established businesses or brands. This can pose a great challenge to small businesses. Luckily, Invoice Factoring services come to the rescue!
What factoring companies mainly look at is the ability of a company's customers to pay their outstanding invoices. Unlike traditional lenders like a bank, it doesn't solely rely on the business's net worth. Moreover, factoring services are not subject to high-interest rates as opposed to conventional financial institutions. Nonetheless, businesses of all sizes utilize factoring services as they make the process quick.
5. It reduces the risk of late payments
Often, late payments hinder business processes. Undoubtedly, there are provisions where you, as a business owner, are eligible to take legal actions against your debtors or customers. But this can cost you a considerable amount of time and money. Instead, you can approach factoring firms. They have professionals who know how to collect debts from such customers. Thus, you can free yourself from the hassles of legal procedures.
6. It is not subject to spending restrictions
When you take a business loan, it accompanies a lot of restrictions, i.e., you must spend the amount borrowed only on specific needs. But Invoice Factoring does not impose any limits on your business's spending decisions. This means you can spend the cash borrowed from a factoring company wherever needed.
7. It helps you improve customer relationships
As a business owner, it can be challenging to handle debt collection. With Invoice Factoring, you hand over the responsibility to others. Thus, neither you nor your customers have any grudges against each other when it comes to collecting or paying money, respectively. Therefore, you can have positive, long-lasting relationships with your customers.
Invoice Factoring works great for businesses that need money quickly, have customers who hold reliable paying history, and can afford a little amount of fees that come with selling outstanding invoices to a factoring company. If this sounds like your business, we bet Invoice Factoring is for you!
Kiran Bajpai works as a Marketing Associate at SoftwareSuggest. Her expertise lies in Finance and Accounting Systems. Reading books is something that she can never get bored of, especially those related to politics and history.